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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition Period from                      to                     .
Commission File Number
1-15202

W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware22-1867895
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer Identification No.)
  
475 Steamboat RoadGreenwichConnecticut06830
(Address of principal executive offices)(Zip Code)
(203)629-3000
(Registrant’s telephone number, including area code)
None
Former name, former address and former fiscal year, if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
Title Trading SymbolName
 
Common Stock, par value $.20 per shareWRBNew York Stock Exchange
5.70% Subordinated Debentures due 2058WRB-PENew York Stock Exchange
5.10% Subordinated Debentures due 2059WRB-PFNew York Stock Exchange
4.25% Subordinated Debentures due 2060WRB-PGNew York Stock Exchange
4.125% Subordinated Debentures due 2061WRB-PHNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐
1

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 ☒
Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒
Number of shares of common stock, $.20 par value, outstanding as of October 28, 2021: 176,640,439
2

TABLE OF CONTENTS
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
3

Part I — FINANCIAL INFORMATION
Item 1.     Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
2021		December 31,
2020
(Unaudited)(Audited)
Assets  
Investments:  
Fixed maturity securities (amortized cost of $15,809,028 and $13,755,858; allowance for expected credit losses of $17,283 and $2,580 at September 30, 2021 and December 31, 2020, respectively)
$16,073,135 $14,159,369 
Real estate1,842,400 1,960,914 
Investment funds1,400,932 1,309,430 
Arbitrage trading account860,339 341,473 
Equity securities818,738 625,667 
Loans receivable (net of allowance for expected credit losses of $1,737 and $5,437 at September 30, 2021 and December 31, 2020, respectively)
115,495 84,913 
Total investments21,111,039 18,481,766 
Cash and cash equivalents2,069,029 2,372,366 
Premiums and fees receivable (net of allowance for expected credit losses of $23,676 and $22,883 at September 30, 2021 and December 31, 2020, respectively)
2,524,109 2,167,799 
Due from reinsurers (net of allowance for expected credit losses of $7,277 and $7,801 at September 30, 2021 and December 31, 2020, respectively)
2,792,811 2,424,502 
Deferred policy acquisition costs662,636 556,168 
Prepaid reinsurance premiums670,913 648,376 
Trading account receivables from brokers and clearing organizations221,165 524,727 
Property, furniture and equipment419,941 405,930 
Goodwill169,652 169,652 
Accrued investment income126,245 120,464 
Current and deferred federal and foreign income taxes63,654 — 
Other assets713,094 700,215 
Total assets$31,544,288 $28,571,965 
Liabilities and Equity  
Liabilities:  
Reserves for losses and loss expenses$14,919,576 $13,784,430 
Unearned premiums4,769,313 4,073,191 
Due to reinsurers557,478 426,124 
Trading account securities sold but not yet purchased739 10,048 
Current and deferred federal and foreign income taxes— 48,495 
Other liabilities1,367,353 1,178,546 
Senior notes and other debt2,258,646 1,623,025 
Subordinated debentures1,007,472 1,102,309 
Total liabilities24,880,577 22,246,168 
Equity:  
Preferred stock, par value $0.10 per share:
  
Authorized 5,000,000 shares; issued and outstanding - none
— — 
Common stock, par value $0.20 per share:
  
Authorized 750,000,000 shares, issued and outstanding, net of treasury shares, 176,638,884 and 177,825,150 shares, respectively
70,535 70,535 
Additional paid-in capital1,018,300 1,012,483 
Retained earnings8,920,334 8,348,381 
Accumulated other comprehensive loss(190,862)(62,172)
Treasury stock, at cost, 176,037,616 and 174,851,350 shares, respectively
(3,169,866)(3,058,425)
Total stockholders’ equity6,648,441 6,310,802 
Noncontrolling interests15,270 14,995 
Total equity6,663,711 6,325,797 
Total liabilities and equity$31,544,288 $28,571,965 
See accompanying notes to interim consolidated financial statements.
1

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
2021202020212020
REVENUES:  
Net premiums written$2,325,138 $1,879,316 $6,587,357 $5,464,980 
Change in net unearned premiums(244,120)(130,395)(684,759)(347,727)
Net premiums earned2,081,018 1,748,921 5,902,598 5,117,253 
Net investment income179,851 142,650 506,615 402,844 
Net investment gains (losses):
Net realized and unrealized gains (losses) on investments17,187 (7,772)89,407 (89,404)
Change in allowance for expected credit losses on investments2,314 46,750 (11,003)29,093 
Net investment gains (losses) 19,501 38,978 78,404 (60,311)
Revenues from non-insurance businesses120,374 87,495 316,927 256,966 
Insurance service fees21,467 21,635 69,531 67,256 
Other income2,072 140 3,163 2,446 
Total revenues2,424,283 2,039,819 6,877,238 5,786,454 
OPERATING COSTS AND EXPENSES:  
Losses and loss expenses1,298,392 1,114,632 3,623,630 3,357,011 
Other operating costs and expenses643,045 593,969 1,907,020 1,753,142 
Expenses from non-insurance businesses115,465 85,036 308,453 256,032 
Interest expense35,100 39,768 109,846 114,874 
Total operating costs and expenses2,092,002 1,833,405 5,948,949 5,481,059 
Income before income taxes332,281 206,414 928,289 305,395 
Income tax expense(64,963)(54,048)(191,577)(84,900)
Net income before noncontrolling interests267,318 152,366 736,712 220,495 
Noncontrolling interests(6,021)(688)(8,652)(1,975)
Net income to common stockholders$261,297 $151,678 $728,060 $218,520 
NET INCOME PER SHARE:  
Basic$1.41 $0.82 $3.93 $1.17 
Diluted$1.40 $0.81 $3.89 $1.15 

See accompanying notes to interim consolidated financial statements.





2

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
2021202020212020
Net income before noncontrolling interests$267,318 $152,366 $736,712 $220,495 
Other comprehensive (loss) income:  
Change in unrealized currency translation adjustments(32,822)40,194 (26,235)(36,553)
Change in unrealized investment (losses) gains, net of taxes(35,596)38,273 (102,454)98,016 
Other comprehensive (loss) income (68,418)78,467 (128,689)61,463 
Comprehensive income198,900 230,833 608,023 281,958 
Noncontrolling interests(6,021)(685)(8,651)(1,973)
Comprehensive income to common stockholders$192,879 $230,148 $599,372 $279,985 

See accompanying notes to interim consolidated financial statements.
3

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except per share data)
For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
2021202020212020
COMMON STOCK:  
Beginning and end of period$70,535 $70,535 $70,535 $70,535 
ADDITIONAL PAID-IN CAPITAL:  
Beginning of period$1,035,166 $1,076,043 $1,012,482 $1,056,042 
Restricted stock units issued(28,741)(23,387)(28,668)(26,773)
Restricted stock units expensed11,875 12,063 34,486 35,450 
End of period$1,018,300 $1,064,719 $1,018,300 $1,064,719 
RETAINED EARNINGS:  
Beginning of period$8,682,088 $7,927,280 $8,348,381 $7,932,372 
Cumulative effect adjustment resulting from changes in accounting principles— — — (30,514)
Net income to common stockholders261,297 151,678 728,060 218,520 
Dividends ( $0.13, $0.12, $0.88 and $0.35 per share, respectively)
(23,051)(21,402)(156,107)(62,822)
End of period$8,920,334 $8,057,556 $8,920,334 $8,057,556 
ACCUMULATED OTHER COMPREHENSIVE LOSS:  
Unrealized investment gains (losses):  
Beginning of period$222,855 $209,210 $289,714 $124,514 
Cumulative effect adjustment resulting from changes in accounting principles— — — 24,952 
Change in unrealized (losses) gains on securities without an allowance for expected credit losses(35,707)35,111 (112,852)77,537 
Change in unrealized gains on securities with an allowance for expected credit losses111 3,159 10,397 20,477 
End of period187,259 247,480 187,259 247,480 
Currency translation adjustments:  
Beginning of period(345,299)(458,560)(351,886)(381,813)
Net change in period(32,822)40,194 (26,235)(36,553)
End of period(378,121)(418,366)(378,121)(418,366)
Total accumulated other comprehensive loss$(190,862)$(170,886)$(190,862)$(170,886)
TREASURY STOCK:  
Beginning of period$(3,087,069)$(3,023,392)$(3,058,425)$(2,726,711)
Stock exercised/vested9,946 9,537 10,985 11,758 
Stock repurchased(92,743)(12,957)(122,426)(311,859)
End of period$(3,169,866)$(3,026,812)$(3,169,866)$(3,026,812)
NONCONTROLLING INTERESTS:  
Beginning of period$9,678 $44,275 $14,995 $43,403 
Distributions(429)(400)(8,376)(816)
Net income6,021 688 8,652 1,975 
Other comprehensive income (loss), net of tax— (3)(1)(2)
End of period$15,270 $44,560 $15,270 $44,560 
See accompanying notes to interim consolidated financial statements.
4

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Nine Months
Ended September 30,
 20212020
CASH FROM OPERATING ACTIVITIES:  
Net income to common stockholders$728,060 $218,520 
Adjustments to reconcile net income to net cash from operating activities:  
Net investment (gains) losses(78,404)60,311 
Depreciation and amortization101,330 96,195 
Noncontrolling interests8,652 1,975 
Investment funds(169,538)(1,260)
Stock incentive plans36,486 37,842 
Change in:
Arbitrage trading account(224,613)(40,487)
Premiums and fees receivable(365,092)(175,636)
Reinsurance accounts(255,126)(204,396)
Deferred policy acquisition costs(108,131)(43,955)
Income taxes(81,574)(56,955)
Reserves for losses and loss expenses1,164,594 879,277 
Unearned premiums707,658 407,227 
Other60,092 (41,713)
Net cash from operating activities1,524,394 1,136,945 
CASH (USED IN) FROM INVESTING ACTIVITIES:  
Proceeds from sale of fixed maturity securities1,631,849 3,525,926 
Proceeds from sale of equity securities100,366 66,850 
Distributions from investment funds124,892 83,935 
Proceeds from maturities and prepayments of fixed maturity securities4,672,562 2,876,642 
Purchase of fixed maturity securities(8,442,260)(6,074,429)
Purchase of equity securities(340,424)(77,840)
Real estate sold (purchased)182,998 (42,405)
Change in loans receivable(27,764)1,202 
Net purchases of property, furniture and equipment(53,558)(31,047)
Change in balances due to security brokers110,752 36,561 
Other14 65 
Net cash (used in) from investing activities(2,040,573)365,460 
CASH FROM FINANCING ACTIVITIES:  
Repayment of senior notes and other debt(503,914)(302,453)
Net proceeds from issuance of debt1,032,404 747,399 
Cash dividends to common stockholders(156,107)(62,822)
Purchase of common treasury shares(122,426)(311,859)
Other, net(27,941)(18,465)
Net cash from financing activities222,016 51,800 
Net impact on cash due to change in foreign exchange rates(9,174)(6,468)
Net change in cash and cash equivalents(303,337)1,547,737 
Cash and cash equivalents at beginning of period2,372,366 1,023,710 
Cash and cash equivalents at end of period$2,069,029 $2,571,447 
See accompanying notes to interim consolidated financial statements.
5


W. R. Berkley Corporation and Subsidiaries
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General
    The unaudited consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the “Company”), have been prepared on the basis of U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. Reclassifications have been made in the 2020 financial statements as originally reported to conform to the presentation of the 2021 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. For further information related to areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective income tax rate differs from the federal income tax rate of 21% principally because of tax-exempt investment income and tax benefits related to equity-based compensation, which was partially offset by state and foreign income taxes.


(2) Per Share Data
    The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period (including 7,767,874 and 7,575,168 common shares held in a grantor trust as of September 30, 2021 and 2020, respectively). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.
    The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows:
For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
(In thousands)2021202020212020
Basic185,031 185,765 185,127 187,338 
Diluted186,742 187,717 187,060 189,515 


(3) Recent Accounting Pronouncements and Accounting Policies
Recently adopted accounting pronouncements:
    All accounting and reporting standards that have become effective in 2021 were either not applicable to the Company or their adoption did not have a material impact on the Company. 
Accounting and reporting standards that are not yet effective:
    All recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company.

6

(4) Consolidated Statements of Comprehensive Income

    The following table presents the components of the changes in accumulated other comprehensive (loss) income ("AOCI"):
(In thousands)Unrealized Investment Gains (Losses) Currency Translation AdjustmentsAccumulated Other Comprehensive
(Loss) Income
As of and for the nine months ended September 30, 2021
Changes in AOCI
Beginning of period$289,714 $(351,886)$(62,172)
Other comprehensive (loss) income before reclassifications(120,695)(26,235)(146,930)
Amounts reclassified from AOCI18,241 — 18,241 
Other comprehensive (loss) income(102,454)(26,235)(128,689)
Unrealized investment gain related to noncontrolling interest(1)— (1)
End of period$187,259 $(378,121)$(190,862)
Amounts reclassified from AOCI
Pre-tax$23,091 (1)$— $23,091 
Tax effect (4,850)(2)— (4,850)
After-tax amounts reclassified$18,241 $— $18,241 
Other comprehensive (loss) income
Pre-tax$(130,201)$(26,235)$(156,436)
Tax effect27,747 — 27,747 
Other comprehensive (loss) income$(102,454)$(26,235)$(128,689)
As of and for the three months ended September 30, 2021
Changes in AOCI
Beginning of period$222,855 $(345,299)$(122,444)
Other comprehensive (loss) income before reclassifications(36,249)(32,822)(69,071)
Amounts reclassified from AOCI653 — 653 
Other comprehensive (loss) income(35,596)(32,822)(68,418)
Unrealized investment gain related to noncontrolling interest— — — 
Ending balance$187,259 $(378,121)$(190,862)
Amounts reclassified from AOCI
Pre-tax$827 (1)$— $827 
Tax effect (174)(2)— (174)
After-tax amounts reclassified$653 $— $653 
Other comprehensive (loss) income
Pre-tax$(45,270)$(32,822)$(78,092)
Tax effect9,674 — 9,674 
Other comprehensive (loss) income$(35,596)$(32,822)$(68,418)
7

As of and for the nine months ended September 30, 2020
Changes in AOCI
Beginning of period$124,514 $(381,813)$(257,299)
Cumulative effect adjustment resulting from changes in accounting principles24,952 — 24,952 
Restated beginning of period149,466 (381,813)(232,347)
Other comprehensive income (loss) before reclassifications76,474 (36,553)39,921 
Amounts reclassified from AOCI21,542 — 21,542 
Other comprehensive income (loss)98,016 (36,553)61,463 
Unrealized investment gain related to noncontrolling interest(2)— (2)
End of period$247,480 $(418,366)$(170,886)
Amounts reclassified from AOCI
Pre-tax$27,268 (1)$— $27,268 
Tax effect (5,726)(2)— (5,726)
After-tax amounts reclassified$21,542 $— $21,542 
Other comprehensive income (loss)
Pre-tax$111,756 $(36,553)$75,203 
Tax effect(13,740)— (13,740)
Other comprehensive income (loss)$98,016 $(36,553)$61,463 
As of and for the three months ended September 30, 2020
Changes in AOCI
Beginning of period$209,210 $(458,560)$(249,350)
Other comprehensive income (loss) before reclassifications39,488 40,194 79,682 
Amounts reclassified from AOCI(1,215)— (1,215)
Other comprehensive income (loss)38,273 40,194 78,467 
Unrealized investment gain related to noncontrolling interest(3)— (3)
Ending balance$247,480 $(418,366)$(170,886)
Amounts reclassified from AOCI
Pre-tax$(1,538)(1)$— $(1,538)
Tax effect 323 (2)— 323 
After-tax amounts reclassified$(1,215)$— $(1,215)
Other comprehensive income (loss)
Pre-tax$48,980 $40,194 $89,174 
Tax effect(10,707)— (10,707)
Other comprehensive income (loss)$38,273 $40,194 $78,467 
____________
(1) Net investment gains (losses) in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.


(5) Statements of Cash Flows
    Interest payments were $119,381,000 and $126,932,000 for the nine months ended September 30, 2021 and 2020, respectively. Income taxes were $244,029,000 and $96,000,000 for the nine months ended September 30, 2021 and 2020, respectively.

8

(6) Investments in Fixed Maturity Securities
    At September 30, 2021 and December 31, 2020, investments in fixed maturity securities were as follows:
 
(In thousands)Amortized
Cost		Allowance for Expected Credit Losses (1)Gross UnrealizedFair
Value		Carrying
Value
GainsLosses
September 30, 2021
Held to maturity:
State and municipal$68,920 $(396)$10,548 $— $79,072 $68,524 
Residential mortgage-backed5,250 — 774 — 6,024 5,250 
Total held to maturity74,170 (396)11,322 — 85,096 73,774 
Available for sale:
U.S. government and government agency506,703 — 12,137 (507)518,333 518,333 
State and municipal:
Special revenue2,019,757 — 74,682 (2,967)2,091,472 2,091,472 
State general obligation376,534 — 26,967 (629)402,872 402,872 
Pre-refunded209,547 — 16,933 (917)225,563 225,563 
Corporate backed170,962 — 8,271 (1,317)177,916 177,916 
Local general obligation400,760 — 31,267 (505)431,522 431,522 
Total state and municipal3,177,560 — 158,120 (6,335)3,329,345 3,329,345 
Mortgage-backed:
Residential835,729 — 14,156 (7,185)842,700 842,700 
Commercial125,768 — 4,979 (110)130,637 130,637 
Total mortgage-backed961,497 — 19,135 (7,295)973,337 973,337 
Asset-backed4,660,976 — 8,780 (14,201)4,655,555 4,655,555 
Corporate:
Industrial3,057,258 (12)85,049 (9,933)3,132,362 3,132,362 
Financial1,657,059 — 44,534 (1,753)1,699,840 1,699,840 
Utilities402,952 — 17,228 (1,327)418,853 418,853 
Other173,504 — 154 (649)173,009 173,009 
Total corporate5,290,773 (12)146,965 (13,662)5,424,064 5,424,064 
Foreign government1,137,349 (16,875)12,864 (34,611)1,098,727 1,098,727 
Total available for sale15,734,858 (16,887)358,001 (76,611)15,999,361 15,999,361 
Total investments in fixed maturity securities$15,809,028 $(17,283)$369,323 $(76,611)$16,084,457 $16,073,135 
____________
(1) Represents the amount of impairment that has resulted from credit-related factors. The change in the allowance for expected credit losses is recognized in the consolidated statements of income. Amount excludes unrealized losses relating to non-credit factors.
9

(In thousands)Amortized
Cost		Allowance for Expected Credit Losses (1)Gross UnrealizedFair
Value		Carrying
Value
GainsLosses
December 31, 2020
Held to maturity:
State and municipal$67,117 $(798)$13,217 $— $79,536 $66,319 
Residential mortgage-backed6,455 — 1,043 — 7,498 6,455 
Total held to maturity73,572 (798)14,260 — 87,034 72,774 
Available for sale:
U.S. government and government agency586,020 — 18,198 (347)603,871 603,871 
State and municipal:
Special revenue2,137,162 — 96,924 (714)2,233,372 2,233,372 
State general obligation417,397 — 33,407 — 450,804 450,804 
Pre-refunded250,081 — 21,472 (162)271,391 271,391 
Corporate backed206,356 — 8,755 (638)214,473 214,473 
Local general obligation410,583 — 40,596 (555)450,624 450,624 
Total state and municipal3,421,579 — 201,154 (2,069)3,620,664 3,620,664 
Mortgage-backed:
Residential 813,187 — 24,664 (5,238)832,613 832,613 
Commercial181,105 — 6,725 (113)187,717 187,717 
Total mortgage-backed securities994,292 — 31,389 (5,351)1,020,330 1,020,330 
Asset-backed3,218,048 — 10,035 (33,497)3,194,586 3,194,586 
Corporate:
Industrial2,456,516 (518)115,926 (7,449)2,564,475 2,564,475 
Financial1,513,943 — 62,947 (987)1,575,903 1,575,903 
Utilities389,267 — 31,931 (33)421,165 421,165 
Other109,353 — 696 (11)110,038 110,038 
Total corporate4,469,079 (518)211,500 (8,480)4,671,581 4,671,581 
Foreign government993,268 (1,264)28,007 (44,448)975,563 975,563 
Total available for sale13,682,286 (1,782)500,283 (94,192)14,086,595 14,086,595 
Total investments in fixed maturity securities$13,755,858 $(2,580)$514,543 $(94,192)$14,173,629 $14,159,369 
____________
(1) Represents the amount of impairment that has resulted from credit-related factors. The change in the allowance for expected credit losses, excluding the cumulative effect adjustment resulting from changes in accounting principles, is recognized in the consolidated statements of income. Amount excludes unrealized losses relating to non-credit factors.
The following table presents the rollforward of the allowance for expected credit losses for state and municipal held to maturity securities for the nine months ended September 30, 2021 and 2020:
(In thousands)20212020
Allowance for expected credit losses, beginning of period$798 $— 
Cumulative effect adjustment resulting from changes in accounting principles— 69 
Provision for expected credit losses(402)802 
Allowance for expected credit losses, end of period$396 $871 
The following table presents the rollforward of the allowance for expected credit losses for state and municipal held to maturity securities for the three months ended September 30, 2021 and 2020:

10

(In thousands)20212020
Allowance for expected credit losses, beginning of period$453 $948 
Provision for expected credit losses(57)(77)
Allowance for expected credit losses, end of period$396 $871 
The following table presents the rollforward of the allowance for expected credit losses for available for sale securities for the nine months ended September 30, 2021 and 2020:
20212020
(In thousands)Foreign GovernmentCorporateTotalForeign GovernmentCorporateTotal
Allowance for expected credit losses, beginning of period$1,264 $518 $1,782 $— $— $— 
Cumulative effect adjustment resulting from changes in accounting principles— — — 35,645 — 35,645 
Expected credit losses on securities for which credit losses were not previously recorded19,072 16 19,088 12,494 7,058 19,552 
Expected credit losses on securities for which credit losses were previously recorded(2,967)(517)(3,484)295 (3,767)(3,472)
Reduction due to disposals(494)(5)(499)(47,344)(2,685)(50,029)
Allowance for expected credit losses, end of period$16,875 $12 $16,887 $1,090 $606 $1,696 

The following table presents the rollforward of the allowance for expected credit losses for available for sale securities for the three months ended September 30, 2021 and 2020:
20212020
(In thousands)Foreign GovernmentCorporateTotalForeign GovernmentCorporateTotal
Allowance for expected credit losses, beginning of period$18,899 $12 $18,911 $44,769 $724 $45,493 
Expected credit losses on securities for which credit losses were not previously recorded82 — 82 — 261 261 
Expected credit losses on securities for which credit losses were previously recorded(2,106)— (2,106)(252)(9)(261)
Reduction due to disposals— — — (43,427)(370)(43,797)
Allowance for expected credit losses, end of period$16,875 $12 $16,887 $1,090 $606 $1,696 
During the nine months ended September 30, 2021, the Company increased the allowance for expected credit losses for available for sale securities utilizing its credit loss assessment process and inputs used in its credit loss model, primarily due
to foreign government securities that had no reserve in prior periods. During the nine months ended September 30, 2020, the Company decreased the allowance for expected credit losses for available for sale securities primarily due to the disposition of securities which previously had an allowance recorded.






11

The amortized cost and fair value of fixed maturity securities at September 30, 2021, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations.  
(In thousands)Amortized
Cost (1)		Fair
Value
Due in one year or less$1,620,333 $1,622,938 
Due after one year through five years6,835,525 6,974,341 
Due after five years through ten years4,183,230 4,263,746 
Due after ten years2,202,797 2,244,071 
Mortgage-backed securities966,747 979,361 
Total$15,808,632 $16,084,457 
________________
(1) Amortized cost is reduced by the allowance for expected credit losses of $396 thousand related to held to maturity securities.    
At September 30, 2021 and December 31, 2020, there were no investments that exceeded 10% of common stockholders' equity, other than investments in United States government and government agency securities.


(7) Investments in Equity Securities
    At September 30, 2021 and December 31, 2020, investments in equity securities were as follows:
 
(In thousands)CostGross UnrealizedFair
Value		Carrying
Value
GainsLosses
September 30, 2021
Common stocks$549,015 $73,087 $(12,163)$609,939 $609,939 
Preferred stocks221,887 8,702 (21,790)208,799 208,799 
Total$770,902 $81,789 $(33,953)$818,738 $818,738 
December 31, 2020
Common stocks$335,617 $28,742 $(14,178)$350,181 $350,181 
Preferred stocks180,397 95,581 (492)275,486 275,486 
Total$516,014 $124,323 $(14,670)$625,667 $625,667 




(8) Arbitrage Trading Account
    At September 30, 2021 and December 31, 2020, the fair and carrying values of the arbitrage trading account were $860 million and $341 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less).
    The Company uses put options and call options in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options are reported at fair value. As of September 30, 2021, the fair value of short option contracts outstanding was $(273) thousand (notional amount of $11.3 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.





12

(9) Net Investment Income
    Net investment income consisted of the following: 
 For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
(In thousands)2021202020212020
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable$93,031 $97,080 $284,704 $330,941 
Investment funds69,292 18,235 169,538 1,260 
Arbitrage trading account7,187 19,543 30,176 51,985 
Equity securities8,462 1,907 21,854 6,194 
Real estate3,485 7,666 5,517 18,807 
Gross investment income181,457 144,430 511,789 409,187 
Investment expense(1,606)(1,780)(5,174)(6,343)
Net investment income$179,851 $142,650 $506,615 $402,844 


(10) Investment Funds
    The Company evaluates whether it is an investor in a variable interest entity ("VIE"). Such entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or the equity investors, as a group, do not have the characteristics of a controlling financial interest (primary beneficiary). The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis. The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investment funds under the equity method of accounting.    
    The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and its unfunded commitments, which were $458 million as of September 30, 2021.
    Investment funds consisted of the following:
Carrying Value as of Income (Loss) from
Investment Funds
September 30,December 31,For the Nine Months
Ended September 30,
(In thousands)2021202020212020
Financial services408,630 $434,437 $83,455 $3,303 
Transportation340,721 190,125 31,805 (3,521)
Real Estate263,079 310,783 18,497 2,140 
Energy150,414 140,935 14,065 (13,689)
Other funds238,088 233,150 21,716 13,027 
Total$1,400,932 $1,309,430 $169,538 $1,260 
    The Company's share of the earnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements.
Financial services investment funds include the Company’s minority investment in Lifson Re, a Bermuda reinsurance company. Effective January 1, 2021, Lifson Re participates on a fully collateralized basis in a majority of the Company’s reinsurance placements for a 22.5% share of placed amounts. This pertains to all traditional reinsurance/retrocessional placements for both property and casualty business where there is more than one open market reinsurer participating. For the nine months ended September 30, 2021, the Company has ceded approximately $182 million of written premiums to Lifson Re.


13


(11) Real Estate
    Investment in real estate represents directly owned property held for investment, as follows:
Carrying Value
September 30,December 31,
(In thousands)20212020
Properties in operation$1,617,524 $1,738,144 
Properties under development224,876 222,770 
Total$1,842,400 $1,960,914 

    As of September 30, 2021, properties in operation included a long-term ground lease in Washington, D.C., an office complex in New York City, an office building in London, U.K., and the completed portion of a mixed-use project in Washington D.C. Properties in operation are net of accumulated depreciation and amortization of $68,026,000 and $86,970,000 as of September 30, 2021 and December 31, 2020, respectively. Related depreciation expense was $14,412,000 and $19,818,000 for the nine months ended September 30, 2021 and 2020, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $14,397,620 in 2021, $59,304,963 in 2022, $53,608,253 in 2023, $52,738,386 in 2024, $50,218,665 in 2025, $47,171,116 in 2026 and $596,395,513 thereafter.
During the second quarter of 2021, the Company sold two office buildings in Palm Beach and West Palm Beach, Florida. One of these sales also resulted in a $102 million reduction of the Company's non-recourse debt that was supporting the property.
    A mixed-use project in Washington, D.C. has been under development in 2021 and 2020, with the completed portion reported in properties in operation as of September 30, 2021.

(12) Loans Receivable

At September 30, 2021 and December 31, 2020, loans receivable were as follows:
(In thousands)September 30,
2021		December 31,
2020
Amortized cost (net of allowance for expected credit losses):
Real estate loans$89,635 $51,910 
Commercial loans25,860 33,003 
Total$115,495 $84,913 
Fair value:
Real estate loans$91,064 $53,593 
Commercial loans25,859 33,003 
Total$116,923 $86,596 
The real estate loans are secured by commercial and residential real estate primarily located in New York. These loans generally earn interest at fixed or stepped interest rates and have maturities through 2026. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans primarily earn interest on a fixed basis and have varying maturities generally not exceeding 10 years.
Loans receivable in non-accrual status were both $0.2 million as of September 30, 2021 and December 31, 2020.
The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the nine months ended September 30, 2021 and 2020:
14

20212020
(In thousands)Real Estate LoansCommercial LoansTotalReal Estate LoansCommercial LoansTotal
Allowance for expected credit losses, beginning of period$1,683 $3,754 $5,437 $1,502 $644 $2,146 
Cumulative effect adjustment resulting from changes in accounting principles— — — (905)548 (357)
Provision for expected credit losses(254)(3,446)(3,700)1,162 2,892 4,054 
Allowance for expected credit losses, end of period$1,429 $308 $1,737 $1,759 $4,084 $5,843 
During the nine months ended September 30, 2021, the Company reduced the allowance primarily due to the disposal of certain loans.
The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the three months ended September 30, 2021 and 2020:
20212020
(In thousands)Real Estate LoansCommercial LoansTotalReal Estate LoansCommercial LoansTotal
Allowance for expected credit losses, beginning of period$1,501 $469 $1,970 $4,318 $4,401 $8,719 
Provision for expected credit losses(72)(161)(233)(2,559)(317)(2,876)
Allowance for expected credit losses, end of period$1,429 $308 $1,737 $1,759 $4,084 $5,843 
The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions.
    In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions.

15

(13) Net Investment Gains (Losses)
     Net investment gains (losses) were as follows:
For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
(In thousands)2021202020212020
Net investment gains (losses):  
Fixed maturity securities:  
Gains$2,943 $3,811 $16,623 $23,586 
Losses(1,124)(39,162)(5,431)(53,243)
Equity securities (1):
Net realized gains on investment sales2 (176)14,830 5,551 
Change in unrealized (losses) gains(19,244)30,693 (61,818)(61,859)
Investment funds2,526 203 49,897 31,299 
Real estate33,364 3,841 95,765 (3,983)
Loans receivable— — (881)— 
Other(1,280)(6,982)(19,578)(30,755)
Net realized and unrealized gains (losses) on investments in earnings before allowance for expected credit losses17,187 (7,772)89,407 (89,404)
Change in allowance for expected credit losses on investments:
Fixed maturity securities2,081 43,874 (14,703)33,147 
Loans receivable233 2,876 3,700 (4,054)
Change in allowance for expected credit losses on investments2,314 46,750 (11,003)29,093 
Net investment gains (losses) 19,501 38,978 78,404 (60,311)
Income tax expense(4,266)(8,855)(15,417)13,622 
After-tax net investment gains (losses)$15,235 $30,123 $62,987 $(46,689)
Change in unrealized investment (losses) gains on available for sale securities:  
Fixed maturity securities without allowance for expected credit losses$(41,041)$46,164 $(135,099)$89,363 
Fixed maturity securities with allowance for expected credit losses111 5,036 10,397 30,027 
Investment funds(4,098)(198)(4,355)(3,632)
Other(242)(2,022)(1,144)(4,002)
Total change in unrealized investment (losses) gains (45,270)48,980 (130,201)111,756 
Income tax benefit (expense)9,674 (10,707)27,747 (13,740)
Noncontrolling interests— (3)(1)(2)
After-tax change in unrealized investment (losses) gains of available for sale securities$(35,596)$38,270 $(102,455)$98,014 
______________________
(1) The net realized gains or losses on investment sales represent the total gains or losses from the purchase dates of the equity securities. The change in unrealized (losses) gains consists of two components: (i) the reversal of the gain or loss recognized in previous periods on equity securities sold and (ii) the change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held.


16

(14) Fixed Maturity Securities in an Unrealized Loss Position
    The following tables summarize all fixed maturity securities in an unrealized loss position at September 30, 2021 and December 31, 2020 by the length of time those securities have been continuously in an unrealized loss position:
  Less Than 12 Months12 Months or GreaterTotal
(In thousands)Fair
Value		Gross
Unrealized Losses		Fair
Value		Gross
Unrealized Losses		Fair
Value		Gross
Unrealized Losses
September 30, 2021
U.S. government and government agency$61,386 $394 $17,342 $113 $78,728 $507 
State and municipal353,630 4,345 28,562 1,990 382,192 6,335 
Mortgage-backed318,897 4,502 84,883 2,793 403,780 7,295 
Asset-backed3,373,100 12,389 105,823 1,812 3,478,923 14,201 
Corporate1,465,027 11,044 54,678 2,618 1,519,705 13,662 
Foreign government371,164 7,249 47,331 27,362 418,495 34,611 
Fixed maturity securities$5,943,204 $39,923 $338,619 $36,688 $6,281,823 $76,611 
December 31, 2020
U.S. government and government agency$47,649 $347 $17 $— $47,666 $347 
State and municipal147,754 1,165 20,528 904 168,282 2,069 
Mortgage-backed212,388 5,121 23,943 230 236,331 5,351 
Asset-backed1,389,133 6,563 656,877 26,934 2,046,010 33,497 
Corporate612,177 6,721 39,985 1,759 652,162 8,480 
Foreign government143,729 22,871 6,218 21,577 149,947 44,448 
Fixed maturity securities$2,552,830 $42,788 $747,568 $51,404 $3,300,398 $94,192 
    Substantially all of the securities in an unrealized loss position are rated investment grade, except for the securities in the foreign government classification. A significant amount of the unrealized loss on foreign government securities is the result of changes in currency exchange rates. 
    A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2021 is presented in the table below:
($ in thousands)Number of
Securities		Aggregate
Fair Value		Gross
Unrealized Loss
Foreign government31 $119,141 $32,048 
Corporate13 49,623 1,879 
State and municipal2 39,693 335 
Mortgage-backed4 249 16 
Asset-backed1 94 3 
Total51 $208,800 $34,281 
    For fixed maturity securities that management does not intend to sell or to be required to sell, the portion of the decline in value that is considered to be due to credit factors is recognized in earnings, and the portion of the decline in value that is considered to be due to non-credit factors is recognized in other comprehensive income.
     The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due.

17

(15) Fair Value Measurements
    The Company’s fixed maturity available for sale securities, equity securities and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.
Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.
    Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation.
    If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.
    For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.
    
18

    The following tables present the assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 by level:
(In thousands)TotalLevel 1Level 2Level 3
September 30, 2021
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency$518,333 $— $518,333 $— 
State and municipal3,329,345 — 3,329,345 — 
Mortgage-backed973,337 — 973,337 — 
Asset-backed4,655,555 — 4,655,555 — 
Corporate5,424,064 — 5,424,064 — 
Foreign government1,098,727 — 1,098,727 — 
Total fixed maturity securities available for sale15,999,361 — 15,999,361 — 
Equity securities:
Common stocks609,939 600,672 — 9,267 
Preferred stocks208,799 — 199,466 9,333 
Total equity securities818,738 600,672 199,466 18,600 
Arbitrage trading account860,339 837,237 23,102 — 
Total$17,678,438 $1,437,909 $16,221,929 $18,600 
Liabilities:
Trading account securities sold but not yet purchased$739 $739 $— $— 
December 31, 2020
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency$603,871 $— $603,871 $— 
State and municipal3,620,664 — 3,620,664 — 
Mortgage-backed1,020,330 — 1,020,330 — 
Asset-backed3,194,586 — 3,194,586 — 
Corporate4,671,581 — 4,670,581 1,000 
Foreign government975,563 — 975,563 — 
Total fixed maturity securities available for sale14,086,595 — 14,085,595 1,000 
Equity securities:
Common stocks350,181 340,966 — 9,215 
Preferred stocks275,486 — 266,155 9,331 
Total equity securities625,667 340,966 266,155 18,546 
Arbitrage trading account341,473 298,359 43,114 — 
Total$15,053,735 $639,325 $14,394,864 $19,546 
Liabilities:
Trading account securities sold but not yet purchased$10,048 $10,048 $— $— 

19

    The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 2021 and for the year ended December 31, 2020:
  
                        Gains (Losses) Included in:
(In thousands)Beginning
Balance		Earnings (Losses)Other
Comprehensive
Income		ImpairmentsPurchases(Sales)Paydowns / MaturitiesTransfers In / (Out)Ending
Balance
Nine Months Ended September 30, 2021
Assets:
Fixed maturities securities available for sale:
Asset-backed securities$— $— $— $— $— $— $— $— $— 
Corporate$1,000 $— $— $— $— $(1,000)$— $— $— 
Total1,000 — — — — (1,000)— — — 
Equity securities:
Common stocks$9,215 $613 $— $— $— $(561)$— $— $9,267 
Preferred stocks9,331 2 — — — — — — 9,333 
Total18,546 615 — — — (561)— — 18,600 
Arbitrage trading account— 8 — — — (8)— — — 
Total$19,546 $623 $— $— $— $(1,569)$— $— $18,600 
Year Ended
December 31, 2020
Assets:
Fixed maturities securities available for sale:
Asset-backed securities$— $— $— $— $— $— $— $— $— 
Corporate$— $— $— $— $— $— $— $1,000 $1,000 
Total— — — — — — — 1,000 1,000 
Equity securities:
Common stocks9,053 1,228 — — — (1,066)— — 9,215 
Preferred stocks6,505 (174)— — 3,000 — — — 9,331 
Total15,558 1,054 — — 3,000 (1,066)— — 18,546 
Arbitrage trading account— 19 — — — (19)— — — 
Total$15,558 $1,073 $— $— $3,000 $(1,085)$— $1,000 $19,546 
    For the nine months ended September 30, 2021, there were no securities transferred into or out of Level 3. For the year ended December 31, 2020, a fixed maturity security was transferred from Level 2 into Level 3 as a result of observable valuation inputs no longer being available.

20

(16) Reserves for Loss and Loss Expenses
    The Company's reserves for losses and loss expenses are comprised of case reserves and incurred but not reported liabilities ("IBNR"). When a claim is reported, a case reserve is established for the estimated ultimate payment based upon known information about the claim. As more information about the claim becomes available over time, case reserves are adjusted up or down as appropriate. Reserves are also established on an aggregate basis to provide for IBNR liabilities and expected loss reserve development on reported claims.
    Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.
    The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions.
    The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns.
    Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.
    Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.
    The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed.
21

    The table below provides a reconciliation of the beginning and ending reserve balances:
September 30,
(In thousands)20212020
Net reserves at beginning of period$11,620,393 $10,697,998 
Cumulative effect adjustment resulting from changes in accounting principles— 5,927 
Restated net reserves at beginning of period11,620,393 10,703,925 
Net provision for losses and loss expenses:
Claims occurring during the current year (1)3,598,969 3,328,827 
Increase in estimates for claims occurring in prior years (2) (3)1,552 849 
Loss reserve discount accretion 23,109 27,335 
Total3,623,630 3,357,011 
Net payments for claims:  
Current year547,082 570,924 
Prior years2,161,877 2,077,945 
Total2,708,959 2,648,869 
Foreign currency translation(53,935)(21,003)
Net reserves at end of period12,481,129 11,391,064 
Ceded reserves at end of period2,438,447 2,068,295 
Gross reserves at end of period$14,919,576 $13,459,359 
_______________________________________
(1) Claims occurring during the current year are net of loss reserve discounts of $16 million and $8 million for the nine months ended September 30, 2021 and 2020, respectively.
(2) The change in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $13 million and $19 million for the nine months ended September 30, 2021 and 2020, respectively.
(3) For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $5 million and $12 million for the nine months ended September 30, 2021 and 2020, respectively.
The COVID-19 global pandemic has impacted, and may further impact, the Company’s results through its effect on claim frequency and severity. Loss cost trends have been impacted and may be further impacted by COVID-19-related claims in certain lines of business. Losses incurred from COVID-19-related claims have been offset, to a certain extent, by lower claim frequency in certain lines of our businesses; however, as the economy and legal systems have reopened, the benefit of lower claim frequency has begun to abate. Although as populations have continued to be vaccinated against the virus and the effects of the pandemic have receded in many jurisdictions, most particularly the United States, it remains too early to determine the ultimate net impact of COVID-19 on the Company. New variants of the COVID-19 virus, including the “Delta” variant, and the slowing of vaccination rates among certain populations continue to create risks with respect to loss costs and the potential for renewed impact of the other effects of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules.
Most of the COVID-19-related claims reported to the Company to date involve certain short-tailed lines of business, including contingency and event cancellation, business interruption, and film production delay. The Company has also received COVID-19-related claims for longer-tailed casualty lines of business such as workers’ compensation and other liability; however, the estimated incurred loss impact for these reported claims are not material at this time. Given the continuing uncertainty regarding the pandemic's pervasiveness, the future impact that the pandemic may have on claim frequency and severity remains uncertain at this time.
The Company has estimated the potential COVID-19 impact to its contingency and event cancellation, workers’ compensation, and other lines of business under a number of possible scenarios; however, due to COVID-19’s continued evolving impact, there remains a high degree of uncertainty around the Company’s COVID-19 reserves. In addition, should the pandemic continue or worsen as a result of new COVID-19 variants or otherwise, governments in the jurisdictions where we operate may renew their efforts to expand policy coverage terms beyond the policy’s intended coverage. Accordingly, losses arising from these actions, and the other factors described above, could exceed the Company’s reserves established for those related policies.
As of September 30, 2021, the Company had recognized losses for COVID-19-related claims activity, net of reinsurance, of approximately $256 million, of which $220 million relates to the Insurance segment and $36 million relates to
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the Reinsurance & Monoline Excess segment. Such $256 million of COVID-19-related losses included $219 million of reported losses and $37 million of IBNR. For the nine months ended September 30, 2021, the Company recognized current accident year losses for COVID-19-related claims activity, net of reinsurance, of approximately $46 million, of which $43 million relates to the Insurance segment and $3 million relates to the Reinsurance & Monoline Excess segment.
During the nine months ended September 30, 2021, favorable prior year development (net of additional and return premiums) of $5 million included $8 million of favorable development for the Insurance segment, partially offset by $3 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on the 2020 accident year, partially offset by adverse development on the 2016 through 2019 accident years. The favorable development on the 2020 accident year was largely concentrated in the commercial auto liability and other liability lines of business including commercial multi-peril liability. During 2020 the Company achieved larger rate increases in these lines of business than were contemplated in our budget and in our initial loss ratio selections. The Company also experienced significantly lower reported claim frequency in these lines in 2020 relative to historical averages, and lower reported incurred losses relative to our expectations. We believe that the lower claim frequency and lower reported incurred losses were caused by the impacts of the COVID-19 pandemic, for example, lockdowns, reduced driving and traffic, work from home, and court closures. However, due to the uncertainty regarding the ultimate impacts of the pandemic on accident year 2020 incurred losses, the Company elected not to react to these lower reported trends during 2020. As more information becomes available and the 2020 accident year continues to mature, during 2021 we have started to recognize favorable accident year 2020 development in response to the continuing favorable reported loss experience relative to our expectations. The adverse development on the 2016 through 2019 accident years is concentrated largely in the other liability line of business including commercial multi-peril liability, but is also seen to a lesser extent in commercial auto liability. The adverse development on these years is driven by a higher than expected number of large losses reported, and particularly impacted the directors and officers liability and excess and surplus lines casualty classes of business. We also believe that increased social inflation is contributing to the increased number of large losses.
The overall adverse development for the Reinsurance & Monoline Excess segment was driven by adverse development in the other liability and non-proportional reinsurance assumed liability lines of business, related primarily to accident years 2017 through 2019, partially offset by favorable development in excess workers’ compensation which was spread across many prior accident years. The adverse development was driven by higher than expected reported losses on excess of loss treaties written in the U.S. and U.K.
During the nine months ended September 30, 2020, favorable prior year development (net of additional and return premiums) of $12 million included $19 million of favorable development for the Insurance segment, partially offset by $7 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on professional liability business. The favorable workers’ compensation development was spread across many prior accident years, including prior to 2010, but was especially significant in accident year 2019. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends. Our ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have also added to the favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 through 2018 and was largely driven by higher than expected large losses being reported in the directors and officers and lawyers professional liability lines of business.
The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K. for accident years 2016 through 2018, partially offset by favorable development on excess workers’ compensation business. The adverse development was driven by a greater than expected number of reported large losses.

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(17) Fair Value of Financial Instruments
    The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
  September 30, 2021December 31, 2020
(In thousands)Carrying ValueFair ValueCarrying ValueFair Value
Assets:
Fixed maturity securities$16,073,135 $16,084,457 $14,159,369 $14,173,629 
Equity securities818,738 818,738 625,667 625,667 
Arbitrage trading account860,339 860,339 341,473 341,473 
Loans receivable115,495 116,923 84,913 86,596 
Cash and cash equivalents2,069,029 2,069,029 2,372,366 2,372,366 
Trading account receivables from brokers and clearing organizations221,165 221,165 524,727 524,727 
     Due from broker— — 2,585 2,585 
Liabilities:
Due to broker107,435 107,435 — — 
Trading account securities sold but not yet purchased739 739 10,048 10,048 
Senior notes and other debt2,258,646 2,502,912 1,623,025 1,892,444 
Subordinated debentures1,007,472 1,104,166 1,102,309 1,202,842 
    The estimated fair values of the Company’s fixed maturity securities, equity securities and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 15. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.


(18) Premiums and Reinsurance Related Information
The following is a summary of insurance and reinsurance financial information:
For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
(In thousands)2021202020212020
Written premiums:
Direct$2,490,875 $2,018,530 $7,063,151 $5,875,379 
Assumed296,623 244,015 870,295 750,784 
Ceded(462,360)(383,229)(1,346,089)(1,161,183)
Total net premiums written$2,325,138 $1,879,316 $6,587,357 $5,464,980 
Earned premiums:
Direct$2,276,173 $1,877,234 $6,430,957 $5,511,791 
Assumed273,808 237,815 792,515 699,025 
Ceded(468,963)(366,128)(1,320,874)(1,093,563)
Total net premiums earned$2,081,018 $1,748,921 $5,902,598 $5,117,253 
Ceded losses and loss expenses incurred$318,283 $209,706 $872,186 $677,761 
Ceded commissions earned$113,523 $89,104 $322,037 $255,742 
    
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The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the nine months ended September 30, 2021 and 2020:
(In thousands)20212020
Allowance for expected credit losses, beginning of period$22,883 $19,823 
Cumulative effect adjustment resulting from changes in accounting principles— 1,270 
Provision for expected credit losses793 1,940 
Allowance for expected credit losses, end of period$23,676 $23,033 
The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the three months ended September 30, 2021 and 2020:
(In thousands)20212020
Allowance for expected credit losses, beginning of period$24,808 $22,106 
Provision for expected credit losses(1,132)927 
Allowance for expected credit losses, end of period$23,676 $23,033 
The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated amounts due from reinsurers are reported net of an allowance for expected credit losses.
The following table presents the rollforward of the allowance for expected credit losses associated with due from reinsurers for the nine months ended September 30, 2021 and 2020:
(In thousands)20212020
Allowance for expected credit losses, beginning of period$7,801 $690 
Cumulative effect adjustment resulting from changes in accounting principles— 5,927 
Provision for expected credit losses(524)1,124 
Allowance for expected credit losses, end of period$7,277 $7,741 
The following table presents the rollforward of the allowance for expected credit losses associated with due from reinsurers for the three months ended September 30, 2021 and 2020:
(In thousands)20212020
Allowance for expected credit losses, beginning of period$7,283 $7,175 
Provision for expected credit losses(6)566 
Allowance for expected credit losses, end of period$7,277 $7,741 

(19) Restricted Stock Units
    Pursuant to its stock incentive plan, the Company may issue restricted stock units ("RSUs") to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. RSUs are expensed pro-ratably over the vesting period. RSU expenses were $34 million and $35 million for the nine months ended September 30, 2021 and 2020 respectively. A summary of RSUs issued in the nine months ended September 30, 2021 and 2020 follows:
($ in thousands)
UnitsFair Value
2021847,119 $62,981 
2020953,519 $59,683 

(20) Litigation and Contingent Liabilities
    In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of
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insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period.

(21) Leases
    Lessees are required to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months on the balance sheet. All leases disclosed within this footnote are classified as operating leases. Recognized right-of-use asset and lease liability are reported within other assets and other liabilities, respectively, in the consolidated balance sheet. Lease expense is reported in other operating costs and expenses in the consolidated statement of income and accounted for on a straight-line basis over the lease term.
    To determine the discount rate used to calculate present value of future minimum lease payments, the Company uses its incremental borrowing rate during the lease commencement period in line with the respective lease duration. In certain cases, the Company has the option to renew the lease. Lease renewal future payments are included in the present value of the future minimum lease payments when the Company determines it is reasonably certain to renew.
    The main leases entered into by the Company are for office space used by the Company’s operating units across the world. Additionally, the Company, to a lesser extent, has equipment leases mainly for office equipment. Further information relating to operating lease expense and other operating lease information are as follows:
 For the Three Months Ended
September 30,		For the Nine Months Ended September 30,
(In thousands)2021202020212020
Leases:
Lease cost$11,741 $11,016 $34,434 $33,130 
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows$11,212 $11,560 $34,509 $33,869 
Right-of-use assets obtained in exchange for new lease liabilities$31,249 $1,344 $31,098 $5,639 

As of September 30,
($ in thousands)20212020
Right-of-use assets$170,729$172,473
Lease liabilities$207,636$211,808
Weighted-average remaining lease term7.3 years6.7 years
Weighted-average discount rate4.96 %5.93 %
Contractual maturities of the Company’s future minimum lease payments are as follows:
(In thousands)September 30, 2021
Contractual Maturities:
2021$11,387 
202242,708 
202341,574 
202435,935 
202526,941 
Thereafter86,940 
Total undiscounted future minimum lease payments245,485 
Less: Discount impact(37,849)
Total lease liability$207,636 
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(22) Business Segments
    The Company’s reportable segments include the following two business segments, plus a corporate segment:
•Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia.
•Reinsurance & Monoline Excess - reinsurance business on a facultative and treaty basis, primarily in the United States, the United Kingdom, Continental Europe, Australia, the Asia-Pacific Region and South Africa, as well as operations that solely retain risk on an excess basis.
    The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company's overall effective tax rate.
    Summary financial information about the Company's reporting segments is presented in the following tables. Income (loss) before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.
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  Revenues  
(In thousands)Earned
Premiums (1)		Investment
Income 		OtherTotal (2)Pre-Tax Income (Loss)Net Income (Loss) to Common Stockholders
Three months ended September 30, 2021
Insurance$1,819,071 $118,770 $7,289 $1,945,130 $314,000 $252,333 
Reinsurance & Monoline Excess261,947 48,504 — 310,451 52,742 41,964 
Corporate, other and eliminations (3)— 12,577 136,624 149,201 (53,962)(48,235)
Net investment gains— — 19,501 19,501 19,501 15,235 
Total$2,081,018 $179,851 $163,414 $2,424,283 $332,281 $261,297 
Three months ended September 30, 2020
Insurance$1,531,093 $87,828 $9,463 $1,628,384 $178,971 $130,266 
Reinsurance & Monoline Excess217,828 40,306 — 258,134 61,532 49,070 
Corporate, other and eliminations (3)— 14,516 99,807 114,323 (73,067)(57,781)
Net investment gains— — 38,978 38,978 38,978 30,123 
Total$1,748,921 $142,650 $148,248 $2,039,819 $206,414 $151,678 
Nine months ended September 30, 2021
Insurance$5,151,253 $340,710 $23,780 $5,515,743 $862,399 $681,354 
Reinsurance & Monoline Excess751,345 133,092 — 884,437 196,185 155,770 
Corporate, other and eliminations (3)— 32,813 365,841 398,654 (208,699)(172,051)
Net investment gains— — 78,404 78,404 78,404 62,987 
Total$5,902,598 $506,615 $468,025 $6,877,238 $928,289 $728,060 
Nine months ended September 30, 2020
Insurance$4,481,092 $255,392 $25,953 $4,762,437 $431,464 $315,733 
Reinsurance & Monoline Excess636,161 101,477 — 737,638 110,611 88,947 
Corporate, other and eliminations (3)— 45,975 300,715 346,690 (176,369)(139,471)
Net investment losses— — (60,311)(60,311)(60,311)(46,689)
Total$5,117,253 $402,844 $266,357 $5,786,454 $305,395 $218,520 
_________________
(1) Certain amounts included in earned premiums of each segment are related to inter-segment transactions.
(2) Revenues for Insurance from foreign countries for the three months ended September 30, 2021 and 2020 were $220 million and $183 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $638 million and $500 million, respectively. Revenues for Reinsurance & Monoline Excess from foreign countries for the three months ended September 30, 2021 and 2020 were $100 million and $77 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $278 million and $212 million, respectively.
(3) Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments.
Identifiable Assets
(In thousands)September 30,
2021		December 31,
2020
Insurance$23,745,201 $21,702,328 
Reinsurance & Monoline Excess4,857,288 4,654,158 
Corporate, other and eliminations2,941,799 2,215,479 
Consolidated$31,544,288 $28,571,965 

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    Net premiums earned by major line of business are as follows:
 For the Three Months
Ended September 30,		For the Nine Months
Ended September 30,
(In thousands)2021202020212020
Insurance:
Other liability$682,362 $561,595 $1,922,669 $1,653,189 
Short-tail lines (1)347,835 326,019 1,012,465 917,466 
Workers' compensation286,474 271,802 845,394 852,101 
Commercial automobile257,314 203,047 715,519 583,024 
Professional liability245,086 168,630 655,206 475,312 
Total Insurance1,819,071 1,531,093 5,151,253 4,481,092 
Reinsurance & Monoline Excess:
Casualty reinsurance164,095 130,186 466,264 383,375 
Monoline excess (2)52,361 43,577 146,481 126,800 
Property reinsurance45,491 44,065 138,600 125,986 
Total Reinsurance & Monoline Excess261,947 217,828 751,345 636,161 
Total$2,081,018 $1,748,921 $5,902,598 $5,117,253 
______________
(1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.
(2) Monoline excess includes operations that solely retain risk on an excess basis.

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SAFE HARBOR STATEMENT
    
    This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2021 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the impact of significant competition, including new entrants to the industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, including real estate, merger arbitrage, energy related and private equity investments; the effects of emerging claim and coverage issues; the uncertain nature of damage theories and loss amounts, including claims for cybersecurity-related risks; natural and man-made catastrophic losses, including as a result of terrorist activities; the ongoing COVID-19 pandemic; the impact of climate change, which may alter the frequency and increase the severity of catastrophe events; general economic and market activities, including inflation, interest rates, and volatility in the credit and capital markets; the impact of the conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response, on our results and financial condition; foreign currency and political risks (including those associated with the United Kingdom's withdrawal from the European Union, or "Brexit") relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2019; the ability or willingness of our reinsurers to pay reinsurance recoverables owed to us; other legislative and regulatory developments, including those related to business practices in the insurance industry; credit risk related to our policyholders, independent agents and brokers; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; potential difficulties with technology and/or cyber security issues; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
    These risks and uncertainties could cause our actual results for the year 2021 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
    W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates worldwide in two segments of the property and casualty business: Insurance and Reinsurance & Monoline Excess. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance, enterprise risk management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.
    An important part of our strategy is to form new operating units to capitalize on various business opportunities. Over the years, the Company has formed numerous operating units that are focused on important parts of the economy in the U.S., including healthcare, cyber security, energy and agriculture, and on growing international markets, including the Asia-Pacific region, South America and Mexico.
    The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time an insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of capital employed in the industry, and the industry’s willingness to deploy that capital.
    The Company’s profitability is also affected by its investment income and investment gains. The Company’s invested assets are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments have been at low levels for an extended period.
    The Company also invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company's share of the earnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements.
The COVID-19 pandemic, including the related impact on the U.S. and global economies, has adversely affected our results of operations. For the nine months ended September 30, 2021, the Company recorded approximately $46 million for current accident year COVID-19-related losses, net of reinsurance. At the same time, COVID-19 has led to reduced loss frequency in certain lines of business (which has begun a return to pre-pandemic levels as many economies and legal systems have reopened as a result of populations becoming vaccinated). The ultimate impact of COVID-19 on the economy and the Company’s results of operations, financial position and liquidity is not within the Company’s control and unclear due to, among other factors, uncertainty in connection with its claims, reserves and reinsurance recoverables.
The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate. While many of the potential impacts on the Company have receded as populations have begun to become vaccinated, new variants of the COVID-19 virus, including the “Delta” variant, and the slowing of vaccination rates among certain populations, continue to create risks to the Company. As a result, the impact of COVID-19 on the Company’s results of operations for the nine months of 2021 is not necessarily indicative of its impact for the remainder of 2021 or beyond. Despite the effects of COVID-19 to date, the Company’s financial position and liquidity improved for the nine months ended September 30, 2021.

Critical Accounting Estimates
    The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and allowance for expected credit losses on investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments.
    Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and
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related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
    In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.
    In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among other things, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.
    Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to uncertainty. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events.
    Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” and in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.
    The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. Examples of changes in terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points.
    The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known
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changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates.
    Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.
    Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.
    The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2020:
(In thousands)Frequency (+/-)
Severity (+/-)1%5%10%
1%$89,102 $268,193 $492,056 
5%268,193 454,376 687,105 
10%492,056 687,105 930,917 
    Our net reserves for losses and loss expenses of approximately $12.5 billion as of September 30, 2021 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above. The impact of such changes would likely be manifested gradually over the course of many years, as the magnitude of the changes became evident.
    Approximately $2.7 billion, or 22%, of the Company’s net loss reserves as of September 30, 2021 relate to the Reinsurance & Monoline Excess segment. There is a higher degree of uncertainty and greater variability regarding estimates of excess workers' compensation and assumed reinsurance loss reserves. In the case of excess workers’ compensation, our policies generally attach at $1 million or higher. The claims which reach our layer therefore tend to involve the most serious injuries and many remain open for the lifetime of the claimant, which extends the claim settlement tail. These claims also occur less frequently but tend to be larger than primary claims, which increases claim variability. In the case of assumed reinsurance our loss reserve estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is also extended. Management considers the impact of delayed reporting and the extended tail in its selection of loss development factors for these lines of business.
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    Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.
    Following is a summary of the Company’s reserves for losses and loss expenses by business segment:
(In thousands)September 30,
2021		December 31,
2020
Insurance$9,758,754 $9,034,969 
Reinsurance & Monoline Excess2,722,375 2,585,424 
Net reserves for losses and loss expenses12,481,129 11,620,393 
Ceded reserves for losses and loss expenses2,438,447 2,164,037 
Gross reserves for losses and loss expenses$14,919,576 $13,784,430 

    Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business:
(In thousands)Reported Case
Reserves		Incurred But
Not Reported		Total
September 30, 2021
Other liability$1,692,098 $3,079,753 $4,771,851 
Workers’ compensation (1)1,001,955 918,438 1,920,393 
Professional liability450,592 1,049,223 1,499,815 
Commercial automobile473,821 416,273 890,094 
Short-tail lines (2)317,863 358,738 676,601 
Total Insurance3,936,329 5,822,425 9,758,754 
Reinsurance & Monoline Excess (1) (3)1,490,320 1,232,055 2,722,375 
Total$5,426,649 $7,054,480 $12,481,129 
December 31, 2020
Other liability$1,534,514 $2,864,760 $4,399,274 
Workers’ compensation (1)977,035 873,072 1,850,107 
Professional liability414,104 875,163 1,289,267 
Commercial automobile442,975 398,688 841,663 
Short-tail lines (2)295,313 359,345 654,658 
Total Insurance3,663,941 5,371,028 9,034,969 
Reinsurance & Monoline Excess (1) (3)1,442,099 1,143,325 2,585,424 
Total$5,106,040 $6,514,353 $11,620,393 
___________
(1) Reserves for workers’ compensation and Reinsurance & Monoline Excess are net of an aggregate net discount of $462 million and $483 million as of September 30, 2021 and December 31, 2020, respectively.
(2) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.
(3) Reinsurance & Monoline Excess includes property and casualty reinsurance, as well as operations that solely retain risk on an excess basis.
    The Company evaluates reserves for losses and loss adjustment expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.
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    Certain of the Company's insurance and reinsurance contracts are retrospectively rated, whereby the Company collects more or less premiums based on the level of loss activity. For those contracts, changes in loss and loss adjustment expenses for prior years may be fully or partially offset by additional or return premiums.
    Net prior year development (i.e., the sum of prior year reserve changes and prior year earned premiums changes) for the nine months ended September 30, 2021 and 2020 are as follows:
(In thousands)20212020
Net increase in prior year loss reserves$(1,552)$(849)
Increase in prior year earned premiums6,918 12,869 
Net favorable prior year development$5,366 $12,020 
The COVID-19 global pandemic has impacted, and may further impact, the Company’s results through its effect on claim frequency and severity. Loss cost trends have been impacted and may be further impacted by COVID-19-related claims in certain lines of business. Losses incurred from COVID-19-related claims have been offset, to a certain extent, by lower claim frequency in certain lines of our businesses; however, as the economy and legal systems have reopened, the benefit of lower claim frequency has begun to abate. Although as populations have continued to be vaccinated against the virus and the effects of the pandemic have receded in many jurisdictions, most particularly the United States, it remains too early to determine the ultimate net impact of COVID-19 on the Company. New variants of the COVID-19 virus, including the “Delta” variant, and the slowing of vaccination rates among certain populations continue to create risks with respect to loss costs and the potential for renewed impact of the other effects of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules.
Most of the COVID-19-related claims reported to the Company to date involve certain short-tailed lines of business, including contingency and event cancellation, business interruption, and film production delay. The Company has also received COVID-19-related claims for longer-tailed casualty lines of business such as workers’ compensation and other liability; however, the estimated incurred loss impact for these reported claims are not material at this time. Given the continuing uncertainty regarding the pandemic's pervasiveness, the future impact that the pandemic may have on claim frequency and severity remains uncertain at this time.
The Company has estimated the potential COVID-19 impact to its contingency and event cancellation, workers’ compensation, and other lines of business under a number of possible scenarios; however, due to COVID-19’s continued evolving impact, there remains a high degree of uncertainty around the Company’s COVID-19 reserves. In addition, should the pandemic continue or worsen as a result of new COVID-19 variants or otherwise, governments in the jurisdictions where we operate may renew their efforts to expand policy coverage terms beyond the policy’s intended coverage. Accordingly, losses arising from these actions, and the other factors described above, could exceed the Company’s reserves established for those related policies.
As of September 30, 2021, the Company had recognized losses for COVID-19-related claims activity, net of reinsurance, of approximately $256 million, of which $220 million relates to the Insurance segment and $36 million relates to the Reinsurance & Monoline Excess segment. Such $256 million of COVID-19-related losses included $219 million of reported losses and $37 million of IBNR. For the nine months ended September 30, 2021, the Company recognized current accident year losses for COVID-19-related claims activity, net of reinsurance, of approximately $46 million, of which $43 million relates to the Insurance segment and $3 million relates to the Reinsurance & Monoline Excess segment.
During the nine months ended September 30, 2021, favorable prior year development (net of additional and return premiums) of $5 million included $8 million of favorable development for the Insurance segment, partially offset by $3 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on the 2020 accident year, partially offset by adverse development on the 2016 through 2019 accident years. The favorable development on the 2020 accident year was largely concentrated in the commercial auto liability and other liability lines of business including commercial multi-peril liability. During 2020 the Company achieved larger rate increases in these lines of business than were contemplated in our budget and in our initial loss ratio selections. The Company also experienced significantly lower reported claim frequency in these lines in 2020 relative to historical averages, and lower reported incurred losses relative to our expectations. We believe that the lower claim frequency and lower reported incurred losses were caused by the impacts of the COVID-19 pandemic, for example, lockdowns, reduced driving and traffic, work from home, and court closures. However, due to the uncertainty regarding the ultimate impacts of the pandemic on accident year 2020 incurred losses, the Company elected not to react to these lower reported trends during 2020. As more information becomes available and the 2020 accident year continues to mature, during 2021 we have started to recognize favorable accident year 2020 development in response to the continuing favorable reported loss experience relative to our expectations. The adverse development on the 2016 through 2019 accident years is concentrated largely in the other liability line of business including commercial multi-peril
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liability, but is also seen to a lesser extent in commercial auto liability. The adverse development on these years is driven by a higher than expected number of large losses reported, and particularly impacted the directors and officers liability and excess and surplus lines casualty classes of business. We also believe that increased social inflation is contributing to the increased number of large losses.
The overall adverse development for the Reinsurance & Monoline Excess segment was driven by adverse development in the other liability and non-proportional reinsurance assumed liability lines of business, related primarily to accident years 2017 through 2019, partially offset by favorable development in excess workers’ compensation which was spread across many prior accident years. The adverse development was driven by higher than expected reported losses on excess of loss treaties written in the U.S. and U.K.
During the nine months ended September 30, 2020, favorable prior year development (net of additional and return premiums) of $12 million included $19 million of favorable development for the Insurance segment, partially offset by $7 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on professional liability business. The favorable workers’ compensation development was spread across many prior accident years, including prior to 2010, but was especially significant in accident year 2019. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends. Our ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have also added to the favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 through 2018 and was largely driven by higher than expected large losses being reported in the directors and officers and lawyers professional liability lines of business.
The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K. for accident years 2016 through 2018, partially offset by favorable development on excess workers’ compensation business. The adverse development was driven by a greater than expected number of reported large losses.
Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,395 million and $1,655 million at September 30, 2021 and December 31, 2020, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $462 million and $483 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, discount rates by year ranged from 0.7% to 6.5%, with a weighted average discount rate of 3.4%.
    Substantially all of the workers’ compensation discount (97% of total discounted reserves at September 30, 2021) relates to excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience.
    The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at September 30, 2021), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware.
    Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $61 million at September 30, 2021 and $44 million at December 31, 2020. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.
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    Allowance for Expected Credit Losses on Investments.
    Fixed Maturity Securities – For fixed maturity securities in an unrealized loss position where the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery in value, the amortized cost basis is written down to fair value through net investment gains (losses). For fixed maturity securities in an unrealized loss position where the Company does not intend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment gains (losses), limited by the amount that the fair value is less than the amortized cost basis. Effective January 1, 2020, the allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment gains (losses). The impairment related to non-credit factors is recognized in other comprehensive income (loss).
    The Company’s credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on the performance of the underlying collateral under various economic and default scenarios that involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the rating-level long-term average marginal default rates based on 10 years of historical data, beyond the forecast period. For other inputs, the model in most cases reverts to the baseline long-term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages.
    The Company classifies its fixed maturity securities by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the average of the credit ratings assigned, unless in limited situations the Company’s own analysis indicates an internal rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis.
    A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2021 is presented in the table below:
($ in thousands)Number of
Securities		Aggregate
Fair Value		 Gross Unrealized Loss
Foreign government31 $119,141 $32,048 
Corporate13 49,623 1,879 
State and municipal2 39,693 335 
Mortgage-backed4 249 16 
Asset-backed1 94 3 
Total51 $208,800 $34,281 
    As of September 30, 2021, the Company has recorded an allowance for expected credit losses on fixed maturity securities of $17 million. The Company has evaluated the remaining fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due.
Loans Receivable – For loans receivable, the Company estimates an allowance for expected credit losses based on relevant information about past events, including historical loss experience, current conditions and forecasts that affect the expected collectability of the amortized cost of the financial asset. The allowance for expected credit losses is presented as a reduction to amortized cost of the financial asset in the consolidated balance sheet and changes to the estimate for expected credit losses are recognized through net investment gains (losses). Loans receivable are reported net of an allowance for expected credit losses of $2 million and $5 million as of September 30, 2021 and December 31, 2020, respectively.
    Fair Value Measurements. The Company’s fixed maturity available for sale securities, equity securities, and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an
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asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.
    In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.
    Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.
    The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of September 30, 2021:
($ in thousands)Carrying
Value		Percent
of Total
Pricing source:
Independent pricing services$15,680,757 98.0 %
Syndicate manager49,600 0.3 
Directly by the Company based on:
Observable data269,004 1.7 
Total$15,999,361 100.0 %
    Independent pricing services – Substantially all of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2021, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.
    Syndicate manager – The Company has a 15% participation in a Lloyd’s syndicate, and the Company’s share of the securities owned by the syndicate is priced by the syndicate’s manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2.
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    Observable data – If independent pricing is not available, the Company prices the securities directly. Prices are based on observable market data where available, including current trading levels for similar securities and non-binding quotations from brokers. The Company generally requests two or more quotes. If more than one quote is received, the Company sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes obtained from brokers. Since these securities were priced based on observable data, they were classified as Level 2.
    Cash flow model – If the above methodologies are not available, the Company prices securities using a discounted cash flow model based upon assumptions as to prevailing credit spreads, interest rates and interest rate volatility, time to maturity and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3.


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Results of Operations for the Nine Months Ended September 30, 2021 and 2020
Business Segment Results

Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of net premiums earned), expense ratios (underwriting expenses expressed as a percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 2021 and 2020. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
($ in thousands)20212020
Insurance:
Gross premiums written$7,008,617 $5,841,328 
Net premiums written5,741,229 4,754,791 
Net premiums earned5,151,253 4,481,092 
Loss ratio61.4 %65.5 %
Expense ratio28.5 %30.6 %
GAAP combined ratio89.9 %96.1 %
Reinsurance & Monoline Excess:
Gross premiums written$924,829 $784,835 
Net premiums written846,128 710,189 
Net premiums earned751,345 636,161 
Loss ratio61.5 %66.5 %
Expense ratio30.1 %32.1 %
GAAP combined ratio91.6 %98.6 %
Consolidated:
Gross premiums written$7,933,446 $6,626,163 
Net premiums written6,587,357 5,464,980 
Net premiums earned5,902,598 5,117,253 
Loss ratio61.4 %65.6 %
Expense ratio28.7 %30.8 %
GAAP combined ratio90.1 %96.4 %
    Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the nine months ended September 30, 2021 and 2020:
(In thousands, except per share data)20212020
Net income to common stockholders$728,060 $218,520 
Weighted average diluted shares187,060 189,515 
Net income per diluted share$3.89 $1.15 
    The Company reported net income to common stockholders of $728 million in 2021 compared to $219 million in 2020. The $509 million increase in net income was primarily due to an after-tax increase in underwriting income of $316 million mainly due to the growth in premium rates and exposure as well as reductions in loss ratio partly due to lower catastrophe losses and in expense ratio driven by net earned premium growth outpacing expense growth, an after-tax increase in net investment gains of $110 million primarily due to sale of real estate assets, an after-tax increase in net investment income of $82 million primarily due to investment funds, a reduction of $22 million in tax expense due to a change in the effective tax rate, an after-tax increase in profits from non-insurance businesses of $6 million, an after-tax savings from interest expenses of $4 million due to early refinancings, an after-tax increase in profit from insurance service businesses of $2 million and a less than $1 million after-tax increase in other income, partially offset by an after-tax increase in corporate expenses of $23 million which includes an after-tax debt extinguishment expense of $9 million on debt redeemed and increased incentive compensation costs, an after-tax increase of $7 million in minority interest and an after-tax decrease in foreign currency gains of $4 million. The number of weighted average diluted shares decreased by 2.5 million for 2021 compared to 2020 mainly reflecting shares repurchased in 2020 and 2021.

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    Premiums. Gross premiums written were $7,933 million in 2021, an increase of 20% from $6,626 million in 2020. The increase was due to a $1,167 million increase in the Insurance segment and a $140 million increase in the Reinsurance & Monoline Excess segment. Approximately 82% of premiums expiring in 2021 were renewed, and 79% of premiums expiring in 2020 were renewed.
    Average renewal premium rates for insurance and facultative reinsurance increased 9.5% in 2021 when adjusted for changes in exposures, and increased 10.8% excluding workers' compensation.
    A summary of gross premiums written in 2021 compared with 2020 by line of business within each business segment follows:
•Insurance - gross premiums increased 20% to $7,009 million in 2021 from $5,841 million in 2020. Gross premiums increased $410 million (20%) for other liability, $376 million (45%) for professional liability, $186 million (27%) for commercial auto, $175 million (13%) for short-tail lines and $21 million (2%) for workers' compensation.
•Reinsurance & Monoline Excess - gross premiums increased 18% to $925 million in 2021 from $785 million in 2020. Gross premiums increased $111 million (25%) for casualty reinsurance, $27 million (16%) for monoline excess and $2 million (1%) for property reinsurance.
    Net premiums written were $6,587 million in 2021, an increase of 21% from $5,465 million in 2020. Ceded reinsurance premiums as a percentage of gross written premiums were 17% in 2021 and 18% in 2020.
    Premiums earned increased 15% to $5,903 million in 2021 from $5,117 million in 2020. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly, recent rate increases will be earned over the upcoming quarters. Premiums earned in 2021 are related to business written during both 2021 and 2020. Audit premiums were $138 million in 2021 compared with $111 million in 2020.
    Net Investment Income. Following is a summary of net investment income for the nine months ended September 30, 2021 and 2020:
AmountAverage Annualized
Yield
($ in thousands)2021202020212020
Fixed maturity securities, including cash and cash equivalents and loans receivable$284,704 $330,941 2.2 %2.9 %
Investment funds169,538 1,260 16.5 0.1 
Arbitrage trading account30,176 51,985 6.5 12.4 
Equity securities21,854 6,194 5.0 2.4 
Real estate5,517 18,807 0.4 1.2 
Gross investment income511,789 409,187 3.1 2.8 
Investment expenses(5,174)(6,343)— — 
Total$506,615 $402,844 3.1 %2.7 %
    Net investment income increased 26% to $507 million in 2021 from $403 million in 2020 due primarily to a $168 million increase in income from investment funds primarily from financial services and transportation funds, a $16 million increase from equity securities and a $1 million decrease in investment expense, partially offset by a $46 million decrease in income from fixed maturity securities mainly driven by lower investment yields, a $22 million decrease from the arbitrage trading account and a $13 million decrease in real estate. The Company shortened the duration of its fixed maturity security portfolio, thereby reducing the potential impact of mark-to-market on the portfolio and positioning the Company to react quickly to changes in the current interest rate environment. Average invested assets, at cost (including cash and cash equivalents), were $21.9 billion in 2021 and $19.8 billion in 2020.
    Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees increased to $70 million in 2021 from $67 million in 2020, mainly due to the business recovery from the pandemic.
    Net Realized and Unrealized Gains (Losses) on Investments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net
41

realized and unrealized gains on investments were $89 million in 2021 compared with net losses of $89 million in 2020. The gains of $89 million in 2021 reflect net realized gains on investments of $151 million (primarily due to the sale of certain real estate assets and the disposition of an investment fund) partially offset by unrealized losses on equity securities of $62 million. In 2020, the net losses of $89 million reflected net realized losses on investment sales of $27 million and an increase in unrealized losses on equity securities of $62 million, which was primarily due to market disruptions as a result of COVID-19.
Change in Allowance for Expected Credit Losses on Investments. Based on credit factors, the allowance for expected credit losses is increased or decreased depending on the percentage of unrealized loss relative to amortized cost by security, changes in rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. For the nine months ended September 30, 2021, the pre-tax change in allowance for expected credit losses on investments increased by $11 million ($9 million after-tax), which is reflected in net investment gains (losses), primarily related to foreign government securities which did not previously have an allowance. For the nine months ended September 30, 2020, the pre-tax change in allowance for expected credit losses on investments decreased by $29 million ($23 million after-tax), which is reflected in net investment gains (losses) primarily due to the disposition of securities which previously had an allowance recorded.
Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenues from non-insurance businesses were $317 million in 2021 and $257 million in 2020. The increase mainly relates to the business recovery from COVID-19 on aviation-related and textile businesses.
    Losses and Loss Expenses. Losses and loss expenses increased to $3,624 million in 2021 from $3,357 million in 2020. The consolidated loss ratio was 61.4% in 2021 and 65.6% in 2020. Catastrophe losses, net of reinsurance recoveries, were $154 million (including current accident year losses of approximately $46 million related to COVID-19) in 2021 and $297 million (including losses of approximately $143 million related to COVID-19) in 2020. Favorable prior year reserve development (net of premium offsets) was $5 million in 2021 and $12 million in 2020. The loss ratio excluding catastrophe losses and prior year reserve development was 58.9% in 2021 and 60.0% in 2020.
    A summary of loss ratios in 2021 compared with 2020 by business segment follows:
•Insurance - The loss ratio was 61.4% in 2021 and 65.5% in 2020. Catastrophe losses were $109 million in 2021 compared with $245 million in 2020. The Company reflected a best estimate (net of reinsurance) based upon available information for current accident year COVID-19-related losses of approximately $43 million, primarily related to contingency and event cancellation coverage. Favorable prior year reserve development was $8 million in 2021 and $19 million in 2020. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.9 points to 59.5% in 2021 from 60.4% in 2020.
•Reinsurance & Monoline Excess - The loss ratio was 61.5% in 2021 and 66.5% in 2020. Catastrophe losses were $45 million in 2021 compared with $53 million in 2020. The Company reflected a best estimate (net of reinsurance) based upon available information for current accident year COVID-19-related losses of approximately $3 million, primarily related to excess workers’ compensation. Adverse prior year reserve development was $3 million in 2021 and $7 million in 2020. The loss ratio excluding catastrophe losses and prior year reserve development decreased 2.1 points to 55.1% in 2021 from 57.2% in 2020.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands)20212020
Policy acquisition and insurance operating expenses$1,694,548 $1,574,507 
Insurance service expenses63,817 64,029 
Net foreign currency gains(19,216)(23,845)
Debt extinguishment costs11,521 — 
Other costs and expenses156,350 138,451 
Total$1,907,020 $1,753,142 
    Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses increased 8% and net premiums earned increased 15% from 2020. The expense ratio (underwriting expenses expressed as a percentage of net premiums earned) was 28.7% in 2021 and 30.8% in 2020. The improvement is primarily attributable to higher
42

net premiums earned outpacing compensation expense growth and lower travel and entertainment expenses due to the global pandemic. However, to the extent our net premiums earned decrease or travel and entertainment expenses increase, due to the impact of the COVID-19 pandemic or otherwise, our expense ratio would be expected to increase.
    Service expenses, which represent the costs associated with the fee-based businesses, were $64 million in both 2021 and 2020.
    Net foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $19 million in 2021 compared to $24 million in 2020. The reduction in gains is primarily related to less weakening of the Argentine Peso and U.K. sterling compared to the U.S. dollar in 2021 versus 2020.
Debt extinguishment costs of $12 million related to the redemption of $400 million of subordinated debentures in March and June 2021 that were due in 2056.
    Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans and new business ventures. Other costs and expenses increased to $156 million in 2021 from $138 million in 2020, primarily due to the increase in performance-based compensation costs in 2021.
    Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from non-insurance businesses were $308 million in 2021 compared to $256 million in 2020. The increase mainly relates to the business recovery from COVID-19 on aviation-related and textile businesses.
Interest Expense. Interest expense was $110 million in 2021 and $115 million in 2020. In May 2020, the Company issued $300 million aggregate principal amount of 4.00% senior notes due 2050. In September 2020, the Company issued an additional $170 million aggregate principal amount of 4.00% senior notes due 2050 and $250 million aggregate principal amount of 4.25% subordinated debentures due 2060 and repaid $300 million aggregate principal amount of 5.375% senior notes at maturity. In October 2020, the Company redeemed $350 million aggregate principal amount of 5.625% subordinated debentures due 2053. In February 2021, the Company issued $300 million aggregate principal amount of 4.125% subordinated debenture due 2061. In March 2021, the Company issued $400 million aggregate principal amount of 3.55% senior notes due 2052 and redeemed its $110 million aggregate principal amount of 5.90% subordinated debentures due 2056. In June 2021, the Company redeemed the $290 million aggregate principal amount of its 5.75% subordinated debentures due 2056. In September 2021, the Company issued $350 million aggregate principal amount of 3.15% senior notes due 2061. The redemptions resulted in debt extinguishment costs of $12 million during the nine months ended September 30, 2021. Additionally in the second quarter of 2021, the Company sold a real estate asset which resulted in a $102 million reduction of the Company's non-recourse debt that was supporting the property.
The redemption of debentures and issuance of additional debentures in 2021, as described below in "Liquidity and Capital Resources -- Debt," are expected to decrease interest expense in 2021 and forward.
Income Taxes. The effective income tax rate was 20.6% in 2021 and 27.8% in 2020. For the nine months ended September 30, 2021, the effective income tax rate differs from the federal income tax rate of 21% principally because of tax-exempt investment income and tax benefits related to equity-based compensation, which was partially offset by state and foreign income taxes. The increased effective income tax rate for the nine months ended September 30, 2020 was principally because utilization of losses in certain foreign jurisdictions was limited.
    The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $132.4 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial.





43


Results of Operations for the Three Months Ended September 30, 2021 and 2020
Business Segment Results

Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of net premiums earned), expense ratios (underwriting expenses expressed as a percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2021 and 2020. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
($ in thousands)20212020
Insurance:
Gross premiums written$2,446,758 $1,981,816 
Net premiums written2,007,194 1,628,316 
Net premiums earned1,819,071 1,531,093 
Loss ratio61.4 %64.4 %
Expense ratio27.9 %29.7 %
GAAP combined ratio89.3 %94.1 %
Reinsurance & Monoline Excess:
Gross premiums written$340,740 $280,729 
Net premiums written317,945 251,000 
Net premiums earned261,947 217,828 
Loss ratio69.3 %59.1 %
Expense ratio29.1 %31.2 %
GAAP combined ratio98.4 %90.3 %
Consolidated:
Gross premiums written$2,787,499 $2,262,545 
Net premiums written2,325,138 1,879,316 
Net premiums earned2,081,018 1,748,921 
Loss ratio62.4 %63.7 %
Expense ratio28.0 %30.0 %
GAAP combined ratio90.4 %93.7 %
    Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended September 30, 2021 and 2020:
(In thousands, except per share data)20212020
Net income to common stockholders$261,297 $151,678 
Weighted average diluted shares186,742 187,717 
Net income per diluted share$1.40 $0.81 
    The Company reported net income to common stockholders of $261 million in 2021 compared to $152 million in 2020. The $109 million increase in net income was primarily due to an after-tax increase in underwriting income of $71 million mainly due to the growth in premium rates and exposure, an after-tax increase in net investment income of $30 million primarily due to investment funds, an after-tax increase in foreign currency gains of $14 million as the U.S. dollar strengthened against other major currencies during the quarter, a reduction of $14 million in tax expense due to a change in the effective tax rate, an after-tax saving on interest expense of $4 million due to early refinancings, an after-tax increase in profits from non-insurance businesses of $2 million and a $1 million after-tax increase in other income, partially offset by an after-tax reduction in net investment gains of $16 million, an after-tax increase in corporate expenses of $6 million and an after-tax increase of $5 million in minority interest. The number of weighted average diluted shares decreased by approximately one million for 2021 compared to 2020 mainly reflecting shares repurchased in 2020 and 2021.

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    Premiums. Gross premiums written were $2,787 million in 2021, an increase of 23% from $2,263 million in 2020. The increase was due to a $465 million increase in the Insurance segment and a $59 million increase in the Reinsurance & Monoline Excess segment. Approximately 81.7% of premiums expiring in 2021 were renewed, and 78.5% of premiums expiring in 2020 were renewed.
    Average renewal premium rates for insurance and facultative reinsurance increased 8.8% in 2021 when adjusted for changes in exposures, and increased 10.1% excluding workers' compensation.
    A summary of gross premiums written in 2021 compared with 2020 by line of business within each business segment follows:
•Insurance - gross premiums increased 23% to $2,447 million in 2021 from $1,982 million in 2020. Gross premiums increased $162 million (23%) for other liability, $142 million (47%) for professional liability, $74 million (16%) for short-tail lines, $67 million (27%) for commercial auto and $20 million (8%) for workers' compensation.
•Reinsurance & Monoline Excess - gross premiums increased 21% to $340 million in 2021 from $281 million in 2020. Gross premiums increased $54 million (36%) for casualty reinsurance and $6 million (10%) for monoline excess, partially offset by a $1 million (1%) reduction for property reinsurance.
    Net premiums written were $2,325 million in 2021, an increase of 24% from $1,879 million in 2020. Ceded reinsurance premiums as a percentage of gross written premiums were 17% in both 2021 and 2020.
    Premiums earned increased 19% to $2,081 million in 2021 from $1,749 million in 2020. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly, recent rate increases will be earned over the upcoming quarters. Premiums earned in 2021 are related to business written during both 2021 and 2020. Audit premiums were $54 million in 2021 compared with $27 million in 2020.
    Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 2021 and 2020:
AmountAverage Annualized
Yield
($ in thousands)2021202020212020
Fixed maturity securities, including cash and cash equivalents and loans receivable$93,031 $97,080 2.1 %2.5 %
Investment funds69,292 18,235 19.9 6.2 
Arbitrage trading account7,187 19,543 3.8 13.8 
Equity securities8,462 1,907 5.0 2.2 
Real estate3,485 7,666 0.8 1.5 
Gross investment income181,457 144,430 3.2 2.9 
Investment expenses(1,606)(1,780)— — 
Total$179,851 $142,650 3.2 %2.8 %
    Net investment income increased 26% to $180 million in 2021 from $143 million in 2020 due primarily to a $51 million increase in income from investment funds primarily from financial services and transportation funds and a $6 million increase from equity securities, partially offset by a $12 million decrease from the arbitrage trading account, a $4 million decrease in income from fixed maturity securities mainly driven by lower investment yields and a $4 million decrease in real estate. The Company shortened the duration of its fixed maturity security portfolio, thereby reducing the potential impact of mark-to-market on the portfolio and positioning the Company to react quickly to changes in the current interest rate environment. Average invested assets, at cost (including cash and cash equivalents), were $22.5 billion in 2021 and $20.3 billion in 2020.
    Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees were $21 million in 2021 and $22 million in 2020. The decrease is primarily due to a reduction of assigned risk plan business.
    Net Realized and Unrealized Gains (Losses) on Investments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net
45

realized and unrealized gains on investments were $17 million in 2021 compared with net losses of $8 million in 2020. The gains of $17 million in 2021 reflect net realized gains on investments of $36 million, partially offset by an increase in unrealized losses on equity securities of $19 million. In 2020, the losses of $8 million reflected net realized losses on investment sales of $39 million and an increase in unrealized gains on equity securities of $31 million.
Change in Allowance for Expected Credit Losses on Investments. Based on credit factors, the allowance for expected credit losses is increased or decreased depending on the percentage of unrealized loss relative to amortized cost by security, changes in rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. For the three months ended September 30, 2021, the pre-tax change in allowance for expected credit losses on investments decreased by $2 million ($1.6 million after-tax), which is reflected in net investment gains (losses). For the three months ended September 30, 2020, the pre-tax change in allowance for expected credit losses on investments decreased by $47 million ($37 million after-tax), which is reflected in net investment gains (losses), primarily due to disposition of securities which previously had an allowance recorded.
Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenues from non-insurance businesses were $120 million in 2021 and $87 million in 2020. The increase mainly relates to the business recovery from COVID-19 on aviation-related and textile businesses.
    Losses and Loss Expenses. Losses and loss expenses increased to $1,298 million in 2021 from $1,115 million in 2020. The consolidated loss ratio was 62.4% in 2021 and 63.7% in 2020. Catastrophe losses, net of reinsurance recoveries, were $74 million (including current accident year losses of approximately $6 million related to COVID-19) in 2021 and $73 million (no additional COVID-19-related losses were recognized in the three months ended September 30, 2020) in 2020. Favorable prior year reserve development (net of premium offsets) was $2 million in 2021 and $5 million in 2020. The loss ratio excluding catastrophe losses and prior year reserve development was 58.9% in 2021 and 59.8% in 2020.
    A summary of loss ratios in 2021 compared with 2020 by business segment follows:
•Insurance - The loss ratio was 61.4% in 2021 and 64.4% in 2020. Catastrophe losses were $39 million in 2021 compared with $74 million in 2020. The Company reflected a best estimate (net of reinsurance) based upon available information for current accident year COVID-19-related losses of approximately $5 million, primarily related to contingency and event cancellation coverage. Adverse prior year reserve development was $3 million in 2021 and favorable prior year reserve development was $7 million in 2020. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.0 point to 59.0% in 2021 from 60.0% in 2020.
•Reinsurance & Monoline Excess - The loss ratio was 69.3% in 2021 and 59.1% in 2020. Catastrophe losses were $35 million in 2021 compared with ($1) million in 2020. The Company reflected a best estimate (net of reinsurance) based upon available information for current accident year COVID-19-related losses of approximately $1 million, primarily related to excess workers’ compensation. Favorable prior year reserve development was $5 million in 2021 and adverse prior year reserve development was $2 million in 2020. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.8 points to 58.1% in 2021 from 58.9% in 2020.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands)20212020
Policy acquisition and insurance operating expenses$583,065 $523,349 
Insurance service expenses21,243 21,034 
Net foreign currency (gains) losses (12,497)5,078 
Other costs and expenses51,235 44,508 
Total$643,046 $593,969 
    Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses increased 11% and net premiums earned increased 19% from 2020. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 28.0% in 2021 and 30.0% in 2020. The improvement is primarily attributable to higher net premiums earned outpacing compensation expense growth. However, to the extent our net premiums earned decrease or travel and entertainment expenses increase, due to the impact of the COVID-19 pandemic or otherwise, our expense ratio would be expected to increase.
46

    Service expenses, which represent the costs associated with the fee-based businesses, were $21 million in both 2021 and 2020.
    Net foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains was $12 million in 2021 compared to losses of $5 million in 2020. The gains in 2021 were driven by the strengthening U.S. dollar against most major currencies in the third quarter of 2021.
    Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans and new business ventures. Other costs and expenses increased to $51 million in 2021 from $45 million in 2020, primarily due to the increase in performance-based compensation costs in 2021.
    Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from non-insurance businesses were $115 million in 2021 compared to $85 million in 2020. The increase mainly relates to the business recovery from COVID-19 on aviation-related and textile businesses.
Interest Expense. Interest expense was $35 million in 2021 and $40 million 2020. In May 2020, the Company issued $300 million aggregate principal amount of 4.00% senior notes due 2050. In September 2020, the Company issued an additional $170 million aggregate principal amount of 4.00% senior notes due 2050 and $250 million aggregate principal amount of 4.25% subordinated debentures due 2060 and repaid $300 million aggregate principal amount of 5.375% senior notes at maturity. In October 2020, the Company redeemed $350 million aggregate principal amount of 5.625% subordinated debentures due 2053. In February 2021, the Company issued $300 million aggregate principal amount of 4.125% subordinated debenture due 2061. In March 2021, the Company issued $400 million aggregate principal amount of 3.55% senior notes due 2052 and redeemed its $110 million aggregate principal amount of 5.90% subordinated debentures due 2056. In June, 2021, the Company redeemed the $290 million aggregate principal amount of its 5.75% subordinated debentures due 2056. In September 2021, the Company issued $350 million aggregate principal amount of 3.15% senior notes due 2061. Additionally in the second quarter of 2021, the Company sold a real estate asset which resulted in a $102 million reduction of the Company's non-recourse debt that was supporting the property.
The redemption of debentures and issuance of additional debentures in 2021, as described below in "Liquidity and Capital Resources -- Debt," are expected to decrease interest expense in 2021 and forward.
Income Taxes. The effective income tax rate was 19.6% in 2021 and 26.2% in 2020. The effective income tax rate
differs from the federal income tax rate of 21% principally because of tax-exempt investment income and tax benefits related to equity-based compensation, which was partially offset by state and foreign income taxes. The increased effective income tax rate for the three months ended September 30, 2020 was principally because the utilization of losses in certain foreign jurisdictions was limited.
    The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $132.4 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial.


47

Investments
    As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. Due to the low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.
    The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration of the fixed maturity portfolio, including cash and cash equivalents, was 2.3 years at September 30, 2021 and 2.4 years at December 31, 2020. The Company’s fixed maturity investment portfolio and investment-related assets as of September 30, 2021 were as follows:
($ in thousands)Carrying
Value		Percent
of Total
Fixed maturity securities:
U.S. government and government agencies$518,333 2.2 %
State and municipal:
Special revenue2,110,271 9.1 
State general obligation447,320 1.9 
Local general obligation431,522 1.9 
Pre-refunded (1)230,840 1.0 
Corporate backed177,916 0.7 
Total state and municipal3,397,869 14.6 
Mortgage-backed:
Agency681,798 2.9 
Residential-Prime159,826 0.7 
          Commercial130,637 0.6 
Residential-Alt A6,326 — 
Total mortgage-backed978,587 4.2 
Asset-backed4,655,555 20.0 
Corporate:
Industrial3,132,362 13.5 
Financial1,699,840 7.3 
Utilities418,853 1.8 
Other173,009 0.7 
Total corporate5,424,064 23.3 
Foreign government and foreign government agencies1,098,727 4.7 
Total fixed maturity securities16,073,135 69.0 
Equity securities:
Common stocks609,939 2.6 
Preferred stocks208,799 0.9 
Total equity securities818,738 3.5 
Cash and cash equivalents (2)2,182,020 9.4 
Real estate1,842,400 7.9 
Investment funds1,400,140 6.0 
Arbitrage trading account860,339 3.7 
Loans receivable115,496 0.5 
Total investments$23,292,268 100.0 %
____________________
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(1) Pre-refunded securities are securities for which an escrow account has been established to fund the remaining payments of principal and interest through maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury and U.S. government agency securities.
(2) Cash and cash equivalents includes trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases.

Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations.
The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.
Equity Securities. Equity securities primarily represent investments in common and preferred stocks in companies with potential growth opportunities in different sectors, mainly in the financial institutions and energy sectors.
Investment Funds. At September 30, 2021, the carrying value of investment funds was $1,401 million, including investments in financial services funds of $409 million, transportation funds of $341 million, real estate funds of $263 million, other funds of $238 million and energy funds of $150 million. Investment funds are generally reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At September 30, 2021, real estate properties in operation included a long-term ground lease in Washington D.C., an office complex in New York City, an office building in London, and the completed portion of a mixed-use project in Washington D.C. In addition, part of the previously mentioned mixed-use project in Washington D.C. is under development. The Company expects to fund further development costs for the project with a combination of its own funds and external financing.
Arbitrage Trading Account. The arbitrage trading account is comprised of direct investments in arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers.
Loans Receivable. Loans receivable, which are carried at amortized cost (net of allowance for expected credit losses), had an amortized cost of $115 million and an aggregate fair value of $117 million at September 30, 2021. The amortized cost of loans receivable is net of an allowance for expected credit losses of $2 million as of September 30, 2021. Loans receivable include real estate loans of $89 million that are secured by commercial and residential real estate located primarily in New York. Real estate loans generally earn interest at fixed or stepped interest rates and have maturities through 2026. Loans receivable include commercial loans of $26 million that are secured by business assets and have fixed interest rates with varying maturities not exceeding 10 years.
Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration for the fixed maturity portfolio (including cash and cash equivalents) was 2.3 years at September 30, 2021 and 2.4 years at December 31, 2020.
In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

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Liquidity and Capital Resources
    Cash Flow. Cash flow provided from operating activities increased to $1,524 million in the first nine months of 2021 from $1,137 million in the first nine months of 2020, primarily due to an increase in premium receipts, net of reinsurance and commissions settled, partially offset by an increase in tax payments.
    The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company generally targets an average duration for its investment portfolio that is within 1.5 years of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 78.2% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2021. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.
    Debt. At September 30, 2021, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $3,266 million and a face amount of $3,292 million, including $300 million aggregate principal amount of its 4.125% subordinated debentures due 2061 issued in February 2021, $400 million aggregate principal amount of its 3.55% senior notes due 2052 issued in March 2021 and $350 million aggregate principal amount of its 3.15% senior notes due 2061 issued in September 2021. The Company redeemed its $110 million aggregate principal amount of 5.90% subordinated debentures due 2056 on March 1, 2021 and its $290 million aggregate principal amount of 5.75% subordinated debentures due 2056 on June 1, 2021. Additionally in the second quarter of 2021, the Company sold a real estate asset which resulted in a $102 million reduction of the Company's non-recourse debt that was supporting the property. The maturities of the outstanding debt are $5 million in 2021, $427 million in 2022, $5 million in 2025, $250 million in 2037, $350 million in 2044, $470 million in 2050, $400 million in 2052, $185 million in 2058, $300 million in 2059, $250 million in 2060, and $650 million in 2061.
    Equity. At September 30, 2021, total common stockholders’ equity was $6.6 billion, common shares outstanding were 176,638,884 and stockholders’ equity per outstanding share was $37.64. During the three months ended September 30, 2021, the Company repurchased 1,287,556 shares of its common stock for $93 million. During the nine months ended September 30, 2021, the Company repurchased 1,752,619 shares of its common stock for $122 million. In the third quarter of 2021, the board of directors of the Company declared a regular quarterly cash dividend of $0.13 per share. The number of common shares outstanding excludes shares held in a grantor trust established by the Company for delivery upon settlement of vested but mandatorily deferred RSUs.
    Total Capital. Total capitalization (equity, debt and subordinated debentures) was $9.9 billion at September 30, 2021. The percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 33% at September 30, 2021 and 30% at December 31, 2020.

Item 3.     Quantitative and Qualitative Disclosure About Market Risk
    Reference is made to the information under “Investments - Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

Item 4.     Controls and Procedures
    Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
    Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2021, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
    Please see Note 20 to the notes to the interim consolidated financial statements.

Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2020.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    
    Set forth below is a summary of the shares repurchased by the Company during the three months ended September 30, 2021, and the number of shares remaining authorized for purchase by the Company:
Total number
of shares purchased		Average price
paid per share		Total number of shares purchased
as part of publicly announced plans or programs		Maximum number of
shares that may yet be purchased under the plans or programs
July 202150,985 $73.02 50,985 6,218,674 
August 2021496,171 $72.16 496,171 5,722,503 
September 2021740,400 $71.73 740,400 4,982,103 

Item 6. Exhibits
Number 
Form of 2021 Performance Unit Award Agreement under the W. R. Berkley Corporation 2019 Long-Term Incentive Plan.
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
  
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
  
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


 
W. R. BERKLEY CORPORATION



Date:November 4, 2021/s/ W. Robert Berkley, Jr.
 W. Robert Berkley, Jr.
 President and Chief Executive Officer 
  
Date:November 4, 2021/s/ Richard M. Baio
 Richard M. Baio
 Executive Vice President - Chief Financial Officer
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